Employee Value of Retirement Plans Linked to Employer Offering

October 3, 2014 (PLANSPONSOR.com) – An Investment Company Institute (ICI) study finds a clear link between the savings goals of employees and the likelihood that they work for an employer that sponsors a retirement plan.

When
asked the primary reason why they save, younger and lower-income households
typically said they save to fund education, purchase a house, fund other
purchases, or have emergency cash on hand, and are less likely to cite
retirement as the primary reason. In contrast, older and higher-earning
households are more likely to save primarily for retirement. Consistent with
these savings preferences, groups of workers who are more focused on saving for
retirement are also much more likely to work for an employer that offers a
plan.

ICI
found among all private-sector wage and salary workers ages 21 to 64, 53% work
for an employer that sponsors a retirement plan. Among full-time, full-year
workers ages 30 to 64, 62% work for an employer that sponsors a retirement
plan. If the analysis is narrowed further to those groups of workers most
likely to be focused on saving for retirement—workers ages 30 and older with at
least moderate levels of earnings, and all but the lowest-earning workers ages
45 and older—then 70% work for an employer that sponsors a plan, and 75% have
access to a retirement plan through either their own employer or their spouse’s
employer. The 93% participation rate among those within this group with access
to a retirement plan further demonstrates their strong interest in retirement
savings, ICI says.

The
study also found, although only 17% of workers at firms with fewer than 10
employees work for an employer that sponsors a plan—compared with 71% of
workers at firms with 1,000 employees or more—if a firm sponsors a plan,
approximately eight in 10 employees participate, regardless of firm size.

ICI explains that workers
search for jobs that offer them the most valuable compensation packages. Individuals
who wish to save for retirement value pension benefits because the benefits
offer favorable tax treatment and other advantages such as the pooling of
investments. However, because of the restrictions and tax penalties placed on
accessing retirement benefits prior to retirement, some individuals who are not
focused on saving for retirement would prefer cash-only compensation to an otherwise equivalent compensation package that
includes both cash and pension benefits.

On
the other hand, an employer is more likely to offer retirement benefits as part
of the compensation package if its workforce values such benefits. ICI contends
it is reasonable to predict that the likelihood of a firm offering retirement
benefits is greater if a higher proportion of its workforce has the ability to
save and is focused on saving for retirement.

More
formally, a firm sponsors a retirement plan if the associated reduction in the
firm’s direct compensation costs (cash compensation plus retirement benefits)
is sufficient to cover the costs incurred by the firm to set up and administer the
plan. A firm would not offer retirement benefits if doing so would increase its
total compensation costs. Total compensation costs would increase if the costs
incurred by the firm to set up and administer a retirement plan were greater
than the associated reduction in the firm’s direct compensation costs (cash
compensation plus retirement benefits that accrue to employees). ICI explains this
would be the case if a firm’s employees valued retirement benefits no more highly
than cash compensation. This would also be the case if a firm’s employees did
value retirement benefits more highly than cash compensation, but the costs the
firm would incur to set up and administer a plan would be greater than any
associated reduction in direct compensation costs.

“It’s
well known that about half of America’s workers are covered by an
employer-sponsored retirement plan, but less is known about who is in that
half, and why,” says Peter Brady, ICI senior economist and a coauthor of the
study. “Policy discussions surrounding retirement often focus on this
statistic, but the percentage of the workforce with a retirement plan today is
an underestimate of the percentage of workers who will reach retirement having
accrued employer-provided retirement benefits. Many more workers will have
access to a plan at some point in their career than is indicated by taking a
snapshot of coverage at any single point in time.”

According
to ICI, the study provides a comprehensive analysis of the private pension
system to provide facts for policymakers, employers, and the financial services
industry to consider as they work to increase retirement plan coverage.